s the Federal Reserve continues to raise interest rates in the face of a strengthening economy, the industry is increasingly focused on competition for core deposits, a “sticky” form of funding comprised of checking and savings accounts from customers who are less likely to chase rates. These provide banks with a stable source of funding at a low cost.
“Core deposits are one of the most valuable things we can do as a bank,” says Harold Wentworth, senior vice president of retail banking, sales and marketing at Community Bank System. “If you can get that checking account, you have the opportunity to help that customer in a variety of ways,” he says, through loans or fee-producing products.
Bank Director sought to recognize those banks that demonstrate strong core deposit growth while also effectively managing costs. To reward growth, we examined growth in core deposits from March 2016 to March 2018, and determined the percentage of core deposits gained organically, rather than via acquisition. Additionally, we examined net interest margin as of March 2018, as well as cost of funds, fee income from deposit accounts, expressed in absolute terms and as a percentage of net income, and checking account profitability, based on an analysis by Moebs Services, a research and consulting firm. We also included core deposits as a percentage of total deposits in our algorithm.
Each bank was scored compared to its regional peers. Regional winners were then compared to one another and scored again to determine the overall category winner. Due to this second scoring, the overall winner’s final score differs from its regional score.
Community Bank System topped the category overall and for the Northeast region. The bank has seen moderate growth in core deposits and touts an extremely low cost of funds at 0.17 percent, as well as a high level of deposit fee income as a percentage of net income, at 28 percent. More than 99 percent of its total deposits are core deposits.
“Several years ago we started focusing heavily [and] put a lot of resources toward growing checking accounts and savings accounts,” says Wentworth. The bank simplified its product offerings, and devoted more dollars and resources to marketing and employee training.
The bank was even willing to pay a small premium to acquire branches when other banks were chasing loans. “They were doing branch deals at a 2 percent core deposit premium,” says Joe Fenech, a managing director at Hovde Group. “When everybody was awash in funding—including them—they foresaw that situation wouldn’t last forever.”
While Community Bank System operates in mostly low-growth markets, it offsets that by having a large share of the market. “These are communities in upstate New York that fly well under the radar,” says Fenech. “But they offer those sticky deposits [at a] low cost, and CBU is the dominant bank in most of those markets.”
South State Corp. and Bank OZK tied in the South. Both exhibited a high level of core deposit growth, at 61 percent and 112 percent, respectively, and a tout net interest margins above 4 percent (as does OZK’s Arkansas neighbor, Home Bancshares).
Commerce Bancshares boasts the best core deposit strategy for the Midwest, relying mostly on organic growth. While deposit growth was modest—a little more than 2 percent—the bank’s cost of funds are low—just 0.19 percent—and 24 percent of its net income is generated through deposit fees.
Western Alliance Bancorp. topped the category in the West. It managed to grow core deposits by 48 percent and has a high net interest margin, at 4.54 percent, and a low cost of funds, at 0.34 percent. It also exhibited the best performance for checking profitability.
It should be noted that checking accounts were not profitable at any of these banks. Those doing best are in fact losing less money, rather than making money, on their checking accounts. Banks could bring costs down by simplifying their product selection, says Mike Moebs, CEO of Moebs Services. He also believes banks should reexamine their fee structure. “Having a lower fee can produce more volume and therefore, more revenue,” he says.
Banks are using a number of competitive tactics, the most common of which is to simply increase the interest rates paid on deposits. Almost three-quarters of the executives and directors responding to Bank Director’s 2019 Bank M&A Survey indicated they’ve done just that—though how much those have increased was not revealed.
Traditionally, banks paid 50 percent of the federal funds rate on deposits, according to Moebs. Today, the average financial institution is paying just 7 percent. And that’s a problem for banks competing with nonbank entities like PayPal for consumer dollars: When your bank isn’t giving you much for your money, it’s an easier choice to move your dollars to another provider.
How They Ranked: Best Core Deposit Strategy
|SCORE||COST OF FUNDS||GROWTH IN CORE DEPOSITS|
|OVERALL WINNER: Community Bank System||2.24|
|1||Community Bank System||2.18||0.17%||22.7%|
|2||M&T Bank Corp.||2.78||0.42%||-1.81%|
|4||Webster Financial Corp.||3.40||0.53%||14.5%|
|2||Fifth Third Bancorp||2.73||0.68%||5.9%|
|4||Great Western Bancorp||3.20||0.58%||18.7%|
|5||Chemical Financial Corp.||3.51||0.62%||69.8%|
|1||Bank OZK (TIE)||1.96||0.88%||111.9%|
|1||South State Corp. (TIE)||1.96||0.3%||60.8%|
|5||FCB Financial Holdings||4.24||1.08%||52.3%|
|1||Western Alliance Bancorp.||1.98||0.34%||47.7%|
|2||First Republic Bank||2.16||0.5%||34.8%|
|3||Bank of Hawaii Corp.||2.96||0.34%||7.3%|
|4||East West Bancorp||3.56||0.55%||13.9%|
|5||Cathay General Bancorp||4.18||0.62%||25.7%|
SOURCES: Federal Deposit Insurance Corp., Federal Financial Institutions Examination Council, Moebs Services and S&P Global Market Intelligence